Commonly, daily prices limits are widely used for stabilizing stock markets and decrease volatility during overreaction period. However, regulators may not notice that instead of stopping panic sell or overbought, the daily price limits generate a magnet effect, which cause the price to accelerate to the price limits and increase the overall volatility. This research investigates the magnet effect of price limits using high frequency from the Stock Exchange of Thailand. Using AR(2) – GARCH(2,2) as a base model for each stock’s 5-mins returns to capture the effect. The empirical results present evidence of the strong ceiling magnet effect at all conditions, while only some stock’s characteristics find the evidence on the floor magnet effect. When combined volatility changes with the magnet effect, there is evidence to conclude an increase in volatility during price close to the price limits and after stock’s price hit the price limit.
The magnet effect of price limits: Evidence from high-frequency data on the Stock Exchange of Thailand
Post by MSF Chula at Tuesday, 13 July 2021 08:13 AM
Last updated at Tuesday, 13 July 2021 08:13 AM